Chapters 1-3 present an introduction to the overview of general trends and the role of the capital market in general and of banks in particular in the process of financial intermediation. The 3rd year students of the Domestic and International Banking module at Cardi¡ University provided many useful (and critical!) comments, as did the students of the postgraduate International Banking module.
TRENDS IN DOMESTIC AND INTERNATIONAL BANKING
- INTRODUCTION
- DEREGULATION
- FINANCIAL INNOVATION
- GLOBALIZATION
- PROFITABILITY
- CONCLUSION
- SUMMARY
These are (i) the instability of the financial environment, (ii) regulation and (iii) the development of technology in the financial sector. It was the regulation of domestic banks in the USA that led to the development of the Eurodollar offshore market.
FINANCIAL INTERMEDIATION
THE IMPACT OF THE CAPITAL MARKET
INTRODUCTION
THE ROLE OF THE CAPITAL MARKET
Similarly, the maximum possible consumption in period 1 occurs when the agent's borrowing in period 1 exhausts his income in period 2 (consumption in period 2 is zero). The agent's utility is greatest at point P, the tangent point FIL and the agent's best indifference curve (ie, the one furthest from the origin and thus offering the highest level of utility, so that the degree of time preference is equal to 1þr). Y1C1.
DETERMINATION OF THE MARKET RATE OF INTEREST
The £ow demand for securities is positively related to the interest rate because the. Thus, as the interest rate rises, the price of securities falls and the £ow demand increases.
SUMMARY
5 Trace the way in which a reduction in the desire to invest will lead to a reduction in the interest rate. 2. Describe the effects on the market interest rate, and the welfare implications for borrowers and savers of (a) an increase in desired savings, (b) an increase in desired investment.
BANKS AND FINANCIAL INTERMEDIATION
- INTRODUCTION
- DIFFERENT REQUIREMENTS OF BORROWERS AND LENDERS
- TRANSACTION COSTS
- LIQUIDITY INSURANCE
- ASYMMETRY OF INFORMATION
- INFORMATION-SHARING COALITIONS
- BANKS’ ROLES IN DELEGATED MONITORING
- A MECHANISM FOR COMMITMENT
- OPERATION OF THE PAYMENTS MECHANISM
- DIRECT BORROWING FROM THE CAPITAL MARKET
- CONCLUSION
- SUMMARY
11 See Chapter 10 for a full discussion of the presence of economies of scale in the banking sector. The operation of the payment mechanism gives the banks advantages in the process of financial intermediation.
RETAIL AND WHOLESALE BANKING
- INTRODUCTION
- GENERAL FEATURES OF BANKING
- MATURITY TRANSFORMATION
- RESERVE ASSET RATIOS
- RISKS FACED BY BANKS
- RETAIL BANKING
- WHOLESALE BANKING
- UNIVERSAL BANKING
- SUMMARY
Wholesale banks rely more on the interbank market to obtain their money than retail banks. Together they represented roughly 60% of the total money markets (Bank of England Quarterly Bulletin, Autumn 2002, Markets and Operations). The current problems of Japanese banks may be evidence of such a deficiency.
This issue of bank size and banking regulation is discussed in more detail in Chapter 10. It is often argued that stock market discipline is necessary to provide incentives for corporate efficiency. 1 What are the main characteristics of the different types of banks operating in developed economies.
INTERNATIONAL BANKING
- INTRODUCTION
- THE NATURE OF INTERNATIONAL BANKING
- GROWTH OF INTERNATIONAL BANKING
- THE EUROCURRENCY MARKETS
- REASONS FOR THE GROWTH OF THE EUROCURRENCY MARKETS The eurocurrency markets started in the 1960s with a market for dollars deposited
- INSTITUTIONAL ASPECTS OF EUROCURRENCY MARKETS
- CONSEQUENCES OF EUROCURRENCY MARKETS
- SUMMARY
One of the main reasons for the development of the Euro currency business was the regulations imposed on American banks operating in the USA. Finally, the relative importance of different currencies in banks' external claims can be seen in table 5.3. A second important factor in the growth of the euro currency markets is the growth of international banks themselves.
We illustrate the operation of the Eurocurrency market (in this case the currency is dollars) with a simple stylized example. Again there is no net effect on the US banking system because the transfer has only led to a change in ownership of the demand deposit from eurobankAto eurobankB. 5 What are the consequences of the growth of Eurocurrency markets for the international financial system.
THE THEORY OF THE BANKING FIRM
- INTRODUCTION
- THE TEXTBOOK MODEL
- THE PERFECTLY COMPETITIVE BANK
- THE MONOPOLY BANK
- THE IMPERFECT COMPETITION MODEL
- SUMMARY
LþTþR¼D ð6:13Þ with the reserve ratio condition R¼kD. The monopoly bank represents the banking sector as a whole and will face downward demand for loans relative to lending rates and upward demand for deposits relative to deposit rates. with the conditions Lr <0 and Dr >0. The treatment of costs can easily be corrected by incorporating the cost function of (6.8) into the profit function of the monopolistic bank. By representing the lending rate as a function of loans and the deposit rate as a function of deposits, we can express the objective function of the bank as follows:
Dd. the banking industry ¢rm) to the inverse of the elasticity.9 A monopoly bank sets up loans and deposits in such a way that the price margin of loans and deposits above cost is equal to the inverse of the elasticity. Equations (6.21) and (6.22) describe a series of responses of the loan rate and deposit rate to changes in the exchange rate. The number of banks in the market measures competition in the oligopolistic version of the model of the bank ¢rm.
MODELS OF BANKING BEHAVIOUR
- INTRODUCTION
- THE ECONOMICS OF ASSET AND LIABILITY MANAGEMENT
- LIQUIDITY MANAGEMENT
- LOAN PRICING
- ASSET MANAGEMENT
- THE REAL RESOURCE MODEL OF ASSET AND LIABILITY MANAGEMENT
- LIABILITY MANAGEMENT AND INTEREST RATE DETERMINATION
- SUMMARY
You can also see that mediation is impossible if the correlation is unity – the brackets of (7.3.6) and (7.3.7) cannot both be positive. The increase in the portfolio's risk is shown by a shift in the option set to AC0. The proportion of the portfolio in the risk-free asset increases from BC=AC to B0C=A0C.
An increase in the risk-free rate of return (ceteris paribus) will lead to banks increasing their holdings of the risk-free asset. The margin between the loan rate and deposit rate will depend, among other things, on the degree of risk aversion of the bank. The margin between the loan rate and deposit rate will also depend on the operating costs of the bank, among other things.
CREDIT RATIONING
- INTRODUCTION
- THE AVAILABILITY DOCTRINE
- THEORIES OF CREDIT RATIONING
- ASYMMETRIC INFORMATION AND ADVERSE SELECTION
- ADVERSE INCENTIVE
- SCREENING VERSUS RATIONING
- THE EXISTENCE OF CREDIT RATIONING
- SUMMARY
The weakness of the type 1 and 2 models of rationing is the reliance on the relative ignorance of the bank; that is, the presence of asymmetric information. The marginal borrower (i.e. the borrower with low ability) has a lower probability of success than the average and has expected earnings below the opportunity cost of funds provided by the bank. The rate charged on the loan (ie the loan contract price) depends on the risk quality of the loan (or loan class) in question and shocks to the risk-free interest rate.
The risk quality of a loan is measured by the size of the loan (L) divided by the amount of collateral offered (C). The price of the loan contract increases either by increasing the quality of the risk or the risk-free interest rate. Suppose, for example, that an increase in the risk-free interest rate causes the borrower to increase the quality of the loan.
SECURITIZATION
- INTRODUCTION
- SALES OF SECURITIES THROUGH FINANCIAL MARKETS
- DIRECT REPLACEMENT
- UNDERWRITTEN REPLACEMENT
- ASSET BACKED SECURITIZATION (ABS)
- THE PROCESS OF ASSET-BACKED SECURITIZATION
- THE GAINS FROM ASSET-BACKED SECURITIZATION
- CONCLUSIONS
- SUMMARY
Therefore, the public indirectly holds securities and thus bypasses the intermediary role of the banks. What has led to the faster growth rate of the non-bank ¢nancial intermediaries. This part of the process is essential, as the key to the whole process is the negotiability of the financial claims issued by the SPV.
Please note that in this case the rating is limited to the issuer's rating as the bank retains ownership of the loans. In this case, the rating of the CLO depends on the inherent quality of the loans and the credit enhancement process. Even if this is not the case, the relationship between the bank and the customer may be damaged by the transfer of the loan.
THE STRUCTURE OF BANKING
- INTRODUCTION
- MEASUREMENT OF OUTPUT
- REASONS FOR THE GROWTH OF MERGERS AND ACQUISITIONS
- MOTIVES FOR MERGERS
- EMPIRICAL EVIDENCE
- THE PRICE OF ACQUISITIONS
- PRODUCTION FUNCTION APPROACH
- THE COST FUNCTION APPROACH
- THE ACCOUNTING APPROACH
- THE EFFICIENT FRONTIER APPROACH
- EVENT STUDIES
- SUMMARY
The efficiency of the units is therefore measured by the efficiency margin as a performance measure. The selection of the frontier takes place through ¢rms that are relatively more efficient than others in the sample. Thus, the efficient DMU found in the analysis cannot be compared with other DMUs outside the sample.
The problem with this approach is that the total residue (i.e. the gap between best practice and actual company practice) is assumed to be due to X inefficiencies, while some of it may be due to luck, and especially to favorable circumstances. and factors such as measurement errors. Inefficiency¼Average residue of the individual farm Average residue for the farm at the border. Assessing merger effectiveness can be considered in a number of approaches, including (a) the production function, (b) the cost function, (c) accounting, (d) the e⁄cient frontier, and (e) event studies. .
BANK REGULATION
- INTRODUCTION
- THE CASE FOR REGULATION
- REGULATION
- THE CASE AGAINST REGULATION
- SUMMARY
Third, it critically examines the regulatory system from the perspective of the free school of banking. These costs are not insignificant and have been characterized by Goodhart (1995) as representing 'a monstrous and expensive regiment of regulators'.3 Some estimates of category (a) in the UK can be derived from the projected budget of the Financial Services Authority (FSA). ) for which it foresees an expenditure of »201.6 million for the main regulatory activities, although it should be remembered that in the UK the FSA is responsible for the supervision of other financial institutions as well as banks. Of these, 339 closed within a few years and 104 failed to meet all obligations.5 The National Bank Act of 1863 was an attempt to create a stable banking environment and a uniform currency.
One way to deal with excess asset risk is to tie banks' shareholder capital to the bank's risk. For interest rate or currency transactions (swaps, futures, options, etc.), the borrower's weight is the weight described above, except in the case of 5 where a weight of 0.5 is applied (i.e. ^i¼i except i¼5 where ^5¼0: 5 ). The notional (implied) principal is then multiplied by the weight (k) to derive the asset's risk-adjusted value.
RISK MANAGEMENT
- INTRODUCTION
- RISK TYPOLOGY
- INTEREST RATE RISK MANAGEMENT
Secondly, since the interest rate cannot bear all the risk, some form of credit limit is placed. An increase in interest will reduce the bank's net market value. If we show the present value of the bank, then this is the difference between the present value of the assets (PVA market value of the assets) minus the present value of the liabilities (PVL market value of the liabilities).
Consequently, the bank's change is equal to the change in the value of its assets minus the change in the value of its liabilities as defined above. Duration can also be viewed as an approximate measure of the asset's price sensitivity to changes in interest rates. In other words, it is a measure of the elasticity of the asset's price relative to the interest rate.
